This eBook outlines the benefits to business of having a good budget, shares tips on how to create a simple budget, explains how to budget for sales and costs as well as explain break-even.
Business Numbers Made Easy
- Complimentary E-BooksThis eBook is the result of many years experience, working with thousands of business owners to improve profit, cash flow and stakeholder satisfaction.
We’ve condensed, into a high level and simple format, what you need to know to successfully run the financial side of a business. We’ve tried to keep it as ‘plain english’ as possible.
Financial control may not be something you, as a business owner, have the time to work on. This eBook is designed to guide you with what you need to be provided with, by either an employee or an outsourced solution provider.
The points in this eBook often fall into the gap between what a bookkeeper provides and what an external accounting firm delivers. If you’re not receiving this type of information, perhaps it’s time to fill the gap, without paying the full-time salary of a CFO.
Want to inject nearly $38,000 into your bank account without borrowing?
- Cash Flow Management and ForecastingBelieve it or not, you could inject nearly $38,000* into your bank account without borrowing money from the bank. With just a 1% change in four of your business numbers and a 1 day change in three others, it is possible. Read on to find out how you can do it on your business and improve your profit.
For illustration purposes, we’ve used the example of a business with:
| Sales | $1,000,000 |
| Cost of sales | $600,000 |
| Overheads | $400,000 |
| Average outstanding customer payment days | 55 |
| Average outstanding supplier payment days | 37 |
| Average stock turnover days | 43 |
The number of outstanding customer and supplier payment days is the number of days on average that all customers are taking to pay, despite the agreed terms. This is not unusual when customer payment management is disorganised. The average stock turnover days is the number of days on average that all stock sits in store waiting to be sold. As you can see this business is just breaking even (a typical scenario for many small businesses).
In this example, if we can change each of the above numbers by just 1% or 1 day, we can create the following improvements to both cash flow and profit. Plus, we’re going to add a modest 1% price increase.
| Cash flow | Profit | |
| Sales improvement = 1% | $10,524 | $10,524 |
| Cost of sales reduction = 1% | $6,000 | $6,000 |
| Overheads reduction = 1% | $4,210 | $4,210 |
| Price increase = 1% | $10,524 | $10,524 |
| Customer payment days reduction = 1 day | $2,883 | $144 |
| Supplier payment days increase = 1 day | $1,730 | $86 |
| Stock turnover improvement = 1 day | $1,730 | $86 |
| Total | $37,601 | $31,573 |
The figures above don’t work out exactly to 1% because there is interest being paid on a business loan. However, you can see how a very small change in each of these numbers can collectively have an extremely positive impact on the business bank account, as well as profit.
Imagine if the sales were multiplied by 10!
As a business owner with a loan under stress or having difficulty getting a loan, this is a great solution. You could be debt free!
The question then is, how do you achieve these changes? They may not all be achievable in every business, however some may be able to be tweaked more than others. For example, you may not be able to achieve the 1% price increase, but you can do more than 1% in costs and/or overheads. A 1-day reduction in customer/supplier payment and stock turnover days is very modest and in many cases easy to fix.
If you’d like us to calculate the impact that could be achieved in your business, give us a call on 1300 362 436 and find a CFO to work it out for you.
*Based on example of $1 million turnover business with typical business numbers
Protect Your Business From Volatility
- Complimentary E-BooksToo many businesses make the error of building and planning their strategies around the ‘good times’ when sales and revenue are high. It’s easy to get lulled into a false sense of security when times are good and think that the good times will keep on rolling, but it pays to remember that all economies are cyclical and downturns are as inevitable as the upturns.
It is essential for all businesses to have a plan in place for managing in uncertain times, and protecting themselves from volatility.
The Top Driver for Profit…It’s Not The One You Think!
- Business GrowthBy Sue Hirst – Director, CFO On-Call
Key Financial Drivers in business are what drive the results. They can have a huge impact on business financial results. A small change can have surprising results, as we will illustrate later in this article.
One of the most sensitive drivers of business profit is Costs or COGS.
COGS are sometimes referred to as COS or Cost of Sales. You may wonder how COGS are different to other costs or overheads in business.
The difference between COGS and Overheads, is COGS mainly only occur when you sell something, whereas Overheads occur whether you make a sale or not. e.g. rent is an overhead, as this has to be paid whether you make a sale or not, whereas purchase of stock or paying service deliverers only occurs when you sell something.
The reason it is important to differentiate between COGS and Overheads is because every business needs to know its Gross Profit. Gross Profit is an important indicator of business performance both for managers and lenders.
COGS is a vital number in determining Gross Profit. Gross Profit is also an important benchmark against which to measure a business to others in its industry.
What type of costs are classified as COGS?
- Purchase of stock to sell
- Movement in stock held i.e. what was held at the beginning of an accounting period versus what was held at the end of the period.
- Freight costs to get goods into and out of stock.
- Labour costs relating to production of a service or product.
- Importing costs e.g. duties etc.
- Discounts given
- Stock adjustments/wastage
- Purchase returns and allowances
- Raw materials
- Manufacturing costs
- Packaging
- Other costs to get goods or services ready for sale.
COGS are often the most sensitive Key Financial Driver in relation to results. We can show examples where a small reduction in COGS can add thousands of dollars on to profit, as well as cash into the bank. This is a healthy result for what can be a small amount of work.
The reason a small reduction in COGS can have such a big impact on profit, is because every dollar saved goes straight on the bottom line. Whereas selling more volume carries with it extra costs and overheads, so you may only end up with a few dollars or cents extra profit for every dollar sold.
A factor in COGS for service businesses is ‘Work in Progress’ (WIP) or labour and materials on jobs.
Many service businesses have no real methodology for handling Work in Progress or Jobs. Getting this function under control in your business can have a huge impact on profit and cash flow.
It is not very difficult to put in place a process for ensuring jobs get invoiced out as quickly as possible, therefore speeding up payment and reducing cash-flow squeeze. There are plenty of systems that easily speed up WIP and jobs, and the resulting improvement in profit and cash flow far outweighs the cost.
Budgeting for COGS is an important function in monitoring profitability. COGS can very easily ‘creep up’ without you realising it. These increased costs need to be passed onto customers in order to maintain margins. Keeping track of such costs may seem like a pain, but the resulting control over margins and profitability far outweighs the cost of maintaining such control.
If you would like to learn more about this subject, plus other useful business financial management tips, check out ‘Business Financial Toolkit’
EOFY Profit & Cash Flow Health Checklist
- Cash Flow Management and ForecastingIs your business due for a profit and cash flow health check?
Download our free EOFY Profit & Cash Flow Health Checklist to help you identify the key factors which may be affecting your business’ profits and cash flow.
Simply click below to download the checklist and start to take control of your business finances:
Key Tips For Competing in a Price Sensitive Market
- Complimentary E-BooksBusinesses are now operating in an increasingly competitive environment driven by globalisation, saturation and diversification of industries, decreasing industries and increasing levels of e-trade and e-commerce.
This dynamic commercial environment creates both opportunities and challenges for businesses.
This eBook lays out a number of levers that businesses can ‘pull’ as an alternative to discounting to combat competition and drive profitable growth.
7 Tips For Boosting Your Profit by 50%
- Latest NewsHow do you create a 51% improvement in profit? Why are we asking this question?
A recent survey of CFO On-Call’s business clients revealed this was the average profit improvement achieved over a three-year period. The important point though is, how were we able to create this result?
Following are the major areas worked on to create this result:
1. Promoting profitable (and eliminating unprofitable) product/service groups or items
This is an easy trap to fall into in any business. Many businesses don’t separate their sales and costs for individual product/service groups or items i.e. they lump all the sales into one account because that’s what the tax office wants to know. This can cause a problem if you have some profitable and some unprofitable areas in a business. The unprofitable ones are cancelling out the profitable ones. If you can do a little work at separating them, so you can clearly see which ones are making money and capitalise on them, and which are losing money and work on why or eliminate them, the result will be better profit overall.
Jobs or projects can be a real profit killer if they aren’t managed well. It’s so easy for overruns in labour to occur and overspend on materials. If jobs aren’t closely monitored and reported on, the mistakes just keep occurring and you end up with very little profit at the end of the day for all the hard work. There are some very cost-effective job management systems available that help to easily eliminate this situation.
2. Helping with effective staff performance
Many business owners struggle with HR management. They can’t find the time, don’t have the tools and templates to make it easy, they are too close to the staff and find it hard to give constructive feedback in the right way.
Well performing staff are an absolute must if you want to run a successful and profitable business. Sometimes it helps to get a little outside help and the results can have a very big impact on the bottom line. There are some fantastic HR management tools available online, that make it so easy to manage hiring, performance and firing. Importantly they help to ensure you do it right and remove the risks associated with HR, as some are backed by industrial relations law firms.
3. Helping set lower levels of overheads and costs
Overheads are the expenses incurred each month, irrespective of whether you sell anything or not. Costs are the direct costs of selling a product or service e.g. buying the product to resell or cost of labour and materials on a job/project.
Overheads are commonly allowed to get out of hand in many businesses. They are incurred as and when things are required in the business without any control or budget. This is a recipe for disaster in profit terms. You bust your guts making sales then find at the end of the year you haven’t made any profit because it’s all been eaten up in overheads and costs that were allowed to get out of hand.
The best way to avoid this is to start with a budget. Think about the minimum overheads you need to run the business. Do you really need to start off with a big factory or office space? Could you manage with a smaller one or one that you just rent when you need it? Can you minimise your staff headcount by being better organised with who does what and outsourcing some work?
Once you’ve worked out your minimum overheads you can enter them into your accounting system to be reported on against actuals each month to ensure they are on track. If they go off track, you can quickly investigate why and fix things.
When you know what your overheads are, you can then work out how much sales you need to make to cover them. This is referred to a your ‘break-even sales’.
When you’ve calculated costs per product or job you then calculate gross margin. For example, if a product costs $40 (including all costs associated with getting the product ready for sale) and you’re selling it for $100, the gross margin is 60%.
Now you need to know your overheads. Let’s say they are $30,000 in overheads per month. To work out break-even sales, take overheads of $30,000 divided by gross margin of 60%, which gives a figure of $50,000. This is your monthly break-even total sales. If your average product sale is $100, divide the total sales break-even figure of $50,000 by your average sale of $100 to come up with a figure of 500 units to breakeven. In simple terms, this means you have to sell 500 units per month at $100 to break-even.
Obviously, the objective isn’t to break-even, however once you know what this figure is it helps in setting targets to achieve profits rather than losses.
4. Ensuring critical customers are effectively serviced and maintained
It seems like a no brainer, however it’s surprising how many businesses don’t even know who their critical customers are, let alone look after them.
A good system will tell you which customers are contributing the most towards sales and profit. The important factor here though is profit. Some customers are great at creating sales, but not the best at profit i.e. they squeeze the lowest price, expect delivery yesterday, pay late and end up just sucking up resources that could have been directed at more profitable customers.
Once you know who your best customers are you can create processes to ensure they are well looked after and their jobs/products are always on time, correct and they feel well serviced. When you know who the rest are you can consider if it’s possible to make them more profitable or release them for your competitors to look after!
5. Ensuring the most cost-effective finance facilities are in place
It’s so easy to put in an application with the lender advertising at the time or your own bank. What many businesses fail to do is compare and analyse the cost of various types of finance. It takes patience to closely read a loan agreement and calculate the true full cost of finance. There are often hidden costs tucked away in the agreement that aren’t quoted up front by lenders. It’s vital to work out how the interest costs will impact profitability. There’s no point taking on finance to grow your business if the profit on extra sales is eaten up by finance costs.
6. Establishing meaningful and effective KPIs to measure results regularly
Setting KPIs is a must for staff, so they are clear about their objectives and targets. Systems for tracking and reporting KPIs make life easy and feed into the financial reporting to ensure leading KPIs help create the desired lagging KPI results. Examples of leading KPIs are number of website visitors or number of leads received. An example of lagging KPIs is average sale per customer.
Breaking a business down into digestible KPI targets for each staff member enables the business to meet its targets and profitability. It also engenders an atmosphere of teamwork amongst staff.
7. Effective balance sheet management of accounts receivables, accounts payables and inventory/work in progress levels
Often business owners look closely at the profit and loss report but tend to skim over the balance sheet. This is generally because they don’t understand what’s in it and have never had it explained in plain English what it means and how vital it is to the business operations.
In our work with clients we focus on ‘7 key numbers that drive profit and cash flow’ being:
- Sales growth %
- Price change %
- Cost of sales %
- Overheads %
- Accounts receivable days
- Accounts payable days
- Stock/work in progress days
Of the 7 key numbers, the first four relate to the profit and loss report, whilst the last three relate to the balance sheet. Those relating to the balance sheet have a massive impact on cash flow. Often people think they just need to sell more without focusing attention on what happens to the money once the sale is made. The biggest issue with cash flow is collecting payment from customers quickly enough, paying suppliers too quickly and having too much stock and work in progress (jobs not yet finished and invoiced). Your money is sitting in the wrong place for too long i.e. with customers and suppliers instead of in your bank account.
Accounts receivable days is a great KPI to set for the person responsible for collecting payments. It’s amazing how much can be collected just by setting up good processes for ensuring payment is received as quickly as possible.
As you can see, these tactics aren’t rocket science, however they do require some planning, application, reporting and someone to be responsible to ensure a desirable outcome.
For more information on ‘7 Key Numbers that Drive Profit and Cash Flow’ contact us
The easy way to ensure that your business has enough cash flow
- Business GrowthSuccessful business owners don’t have sleepless nights worrying about cash flow, because they manage it proactively… so it never becomes an issue.
Here’s how they do it:
1. Budget
A budget is the best place to start managing cash flow. If you feel uncertain about how you’ll make the sales, don’t worry, you can start with what you do know, which is your expenses.
Note down all your expenses for each month. If you know your gross margin on products/services i.e. the percentage of gross profit from sales after deducting direct costs, such as the cost of a product or the cost of labour and materials on a job, you can set a target for sales to ensure you break-even.
Obviously break-even isn’t the objective of many businesses, but it’s a great place to start planning your sales targets to make profits.
2. Cash Flow Forecast
The budget above is a great start in planning profits, but it’s missing a few items needed for predicting cash flow. The first item is timing. In a budget you allow for sales, costs and overheads that match in the month the sale is made.
In the real world it doesn’t happen like that. For example, you may have to pay for costs before the sale is made and you may have to wait a while to get paid by your customer. Your cash flow forecast needs to allow for this.
Other items missing from the budget are things like capital expenditure, for example, equipment, motor vehicles etc, and tax obligations. We often see equipment paid for in cash when times are good then, six months down the track cash gets tight and that cash is needed.
It pays to consider this before rushing out to an end of financial year sale and creating cash flow problems down the track. Tax obligations need to be factored into the cash flow forecast, as they can easily get out of hand if now allowed for.
3. Working Capital
This is the money you need to keep ‘oiling the wheels’ of the business. If customers don’t pay immediately and you need to pay for costs and overheads before you get paid by customers, you need to allow funds to cover this situation.
Your cash flow forecast will tell you how much working capital you need. You will see where the peaks and troughs are likely to be in your bank balance, and you can make plans to cover them. You may need to borrow funds and be able to demonstrate you can repay the loan. If you can’t convince a lender you can repay the loan, you may need to inject your own cash into the business or perhaps seek equity investment from, for example, people or institutions who own part of the business in return for cash injection.
4. Understanding What Impacts Cash Flow
Some of the key drivers of cash flow are revenue, price, cost of goods, overheads, accounts receivable days, accounts payable days, inventory days, work in progress days, capital expenditure, interest and tax. You need to understand how these drivers impact cash flow.
5. Managing Cash Flow
Once you have a clear picture of your future cash position and you understand what impacts it and by how much, you are in an ideal position to manage the situation.
If accounts receivable days are climbing, you need to look at why and how you can get customers to pay more quickly. If inventory days or work in progress days are climbing, you need to look at why and how you can move stock more quickly or get jobs finished quicker, so you can invoice them.
You can use the future picture to decide when to buy and pay for things rather than making a guess and having to run to the bank for a loan unprepared.
6. Borrowing
If you need to borrow to cover troughs in cash flow, it’s best to do it in a planned fashion. You need to understand what lenders look for. Basically, they want to see that you can repay the loan.
They want to see that you are in control of your business and that your projections are realistic. If you give them optimist projections that aren’t justified or ultimately met, they will quickly lose confidence.
They are in business too, so you need to be commercially realistic about your expectations regarding lenders.
7. Growth
It might seem like a no brainer that business growth would be a good thing for cash flow. It’s not always true, and this is what brings many businesses unstuck. I said sales create a need for cash to cover the costs and overheads of running the business, as well as monies due from customers who don’t pay immediately.
Growth also creates a need for more inventory or labour and materials to complete jobs. If you are going to grow your business, it’s vital you consider the extra working capital needed to fund extra sales.
For more detailed information on how you can improve the factors affecting cash flow, download our eBook ‘How To Improve Your Business Cash Flow and Keep Some For Yourself’
How more profit increases business value and owners’ retirement funds
- Business Exit PlanningIf you’re thinking of exiting your business in the next few years and the sale value contributes to your retirement ‘nest egg’, it’s well worth beginning planning now to grow it. Ideally a vendor should start planning exit three years before sale.
There are various ways to value a business. One method is ‘value based on profit’. A multiplier is applied to the profit of the business e.g. three or four times. The multiplier is calculated based on the efficiency and attractiveness of the business. Sometimes there is an industry average that applies.
The value based on profit method is most widely used for established traditional companies. The profit must be sustainable. Startup tech companies are often valued on other criteria, such as ‘multiple of revenue’, as investors perceive a large upside once a business is established.
To put this into perspective, in our article ‘Proof is in the Profit’, the improvement is 51%. Let’s use this as an example to see the impact this could have on the business value:
Previous
Profit $200,000
X multiplier 4
Business Value $800,000
Current
Profit $302,000
X multiplier 4
Business Value $1.208,000
This demonstrates that the business owner would be $408,000* better off when they exit the business. If efficiencies are achieved and the business looks more attractive, the multiplier could also increase by one or two, so this could add an extra $102,000 per point!
This could make a real difference to the owners’ retirement quality of life!
To make a business more attractive business systems should be in place so that continuation is not reliant on the current owner.
*result excludes any tax payable
The Proof is in the Profit
- Latest NewsBy any reasonable standard, an average 51% profit improvement (EBIT), across a number of established business (average turnover of more than $16 million), over three years is very good.
We knew, using our profit improvement process, we have been getting great results for most clients for years.
But it wasn’t until someone said, “Why don’t we take all the results we can find, good and bad, and calculate the average profit improvement over three years worth of results?”
That was a water-shed moment! Without being selective in any way and having the analysis reviewed by at least six of our senior advisors, the results are in.
CFO On-Call clients have had an average increase in profit of 51%* on an average increase in revenue for the same clients of just 15%.
When revenue grows, typically profit doesn’t grow relatively. In many cases it goes down because focus isn’t put on ensuring increased revenue flows to the bottom line.
Due to the involvement of our Interim CFOs, cost control and expenses for our clients was – and always is – a prime focus – the result being an increase in profit of more than three times that of revenue.
To put the percentages into perspective, here’s an example of one client’s experience:
Revenue
2016 2017 2018
$17.1m $19.3m $21.8m
Profit
2016 2017 2018
$1.9m $2.6 $3.4
In this example, revenue grew by 27%, but profit grew by 79%!
What this demonstrates is that business owners who stick with a CFO On-Call profit-improvement process get results sooner than those who focus just on sales growth. These clients have given us the time to work in their business and together with them, we have achieved these very satisfying results.
In some cases, revenue didn’t grow at all, however profit did!
Here’s just some of the tactics that are part of the CFO On-Call profit improvement process:
- Promoting profitable (and eliminating unprofitable) product groups or product items
- Helping with effective staff performance
- Helping set lower levels of overheads costs
- Ensuring critical customers are effectively serviced and maintained
- Ensuring the most cost-effective finance facilities are in place
- Establishing meaningful and effective KPIs to measure results regularly
- Effective balance sheet management of accounts receivables, accounts payables and inventory levels.
Obviously, we can’t take credit for all the improvement – especially revenue – however from experience, we are very confident the increases in profit would have been almost impossible without our input and guidance to set up and manage the process over the period and hold participants accountable for actions and results.
Want to learn how we can help your business?
If you’d like to achieve results like these in your business, please get in touch with us. We are happy to have a chat to see how we can help you achieve your business goals.
Call us on 1300 362 436 (Aus) or 0800 180 400 (NZ) or send us an email on info@CFOonCall.com.au or info@CFOonCall.co.nz
*Average performance of 11 CFO On-Call clients analysed over three-year period.
Mackay businesses: This is how to take advantage of the next business boom
- Latest NewsAs the Mackay regional economy begins its latest business boom, let’s not forget the mistakes of the past. Indeed, let’s be the best we possibly can this time around. During the depths of the downturn, a colleague of mine remarked, “a lot of businesses made a lot of money during the boom, but most should have made a lot more!”
Let’s take a look at how the Mackay employment rate has improved recently. According to the Queensland Government Statistician’s Office statistics released in July 2018, the number of employed persons in Mackay SA4 (Statistical Area Level 4) in June 2018 was 99,200 persons – an increase of 5,700 employed persons, or 6.1 per cent over the year. The unemployment rate in Mackay SA4 in June 2018 was 3.4 per cent, a decrease of 2.0 percentage points over the year. The unemployment rate for this area was the lowest of all 19 SA4s within Queensland.
These stats demonstrate the current strength of businesses in the Mackay region, so if your business is based in this area, now is prime time to ensure your business is on track to take advantage of the business boom. Here’s how…
In almost every case, success in business is fuelled by these few critical factors:
- unbridled passion for achievement (belief – love your business)
- commitment to improvement (conviction – stick to the plan)
- load sharing (trust – you can’t do it all yourself)
As a local business CFO advisor, I’ve worked with businesses through the good, the bad and the ugly of the past few years. The smart ones survived, and listed below are examples of the type of activities we focused on for specific areas of their business:
Business development:
- Identifying and submitting winning tenders – a lot of time can be invested in tendering for work and you need to be sure it’s well directed. A well-crafted tender can position you ahead of the pack.
- Forming strategic alliances – can be a real ‘leg up’ for your business expansion plans. But the way you go about it, without burning relationships and wasting lots of time, is where experience makes all the difference.
- Leveraging your supply chain – you’ve probably heard it many times before – “big mining company ABC are trimming their preferred supplier list.” They do this for good reason – too many suppliers, means more overhead and potential loss of bargaining power. You should think about doing the same and getting more value out of your main suppliers.
- Government grants and assistance – these can provide vital funds for business growth and getting help navigating them can save time and ensure the outcome is what the business really needs.
Productivity gains:
- Targets and incentives – these are a great place to start building your sales, profit, cash flow and business value.
- Staff performance alignment – a great way to motivate staff, have them feel part of something bigger and make your business an ‘employer of choice’.
- Systemisation and management by exception (the rule of 95/5) – a great way to build and empower staff to make good decisions without the boss having to answer every question that arises. 95% of day-to-day matters should follow set procedures and run perfectly smoothly, the role of the manager/boss is to handle the other 5%.
Sales growth:
- Knowledge gaps and scripting – we’ve all heard the old saying, “a good salesman could sell ice to the Eskimos!” But the reality is that not all sales staff are a perfect fit for their role. However, most salespeople improve their performance dramatically when coached in the proper techniques (upselling, closing, after sales service etc.) and when provided with the proper tools, for example templates and scripts of appropriately prepared wording to be used in particular situations such as “would you like fries with that?”
- CRM and loyalty programs – a well maintained CRM (Customer Relationship Management system) is a great way to build sales. It makes it so much easier to communicate with customers, prospective customers and anyone who needs to know what’s happening in your business. Everyone loves a loyalty program – a great way to build and maintain your sales targets.
- Stock sell through – the omni-channel world. If you sell goods and aren’t using more than one method of distribution (channel), you’re headed the way of the Dodo bird! Think Amazon!
General management:
- Define the future – business owners tend to live, eat and breathe their business, it can really help to bounce your ideas off a ‘trusted advisor’ or someone who can act as a ‘sounding board’ for your ideas.
- Challenge the familiar – things are changing at a rate of knots and no-one can afford to stay the same. If you don’t embrace change you will get left behind. Get outside your business from time to time and learn new ways of doing things. And be prepared to fail sometimes – if we aren’t failing, we aren’t trying new things.
- Convene, minute and drive operational performance reviews – encourage your staff to come up with new ways to do things. They are generally at the ‘coal face’ and see first-hand how things can be improved.
Admin:
- Accounting best-practice – it’s very hard to run a business if you aren’t confident in your numbers. A well set up and properly managed accounting process will provide information that you need to make smart decisions about business development. You should be getting simple, high level, graphical reports that you can quickly and easily understand.
- People and culture challenges – most humans want the same thing: they want to be valued, motivated, and feel part of a team. If you set things up right in your business, this will be a natural result of your efforts and it will become the norm, rather than constant complaining, infighting and other endless headaches.
Paul Rickard, a CFO On-Call Partner based in Mackay, is a well-established local and experienced commercial accountant, with a passion for helping businesses achieve their growth potential. To find out more about how Paul can help you take advantage of the next business boom in the Mackay region, please call us on 1300 362 436.
Your Top Key Performance Indicators for Business Checklist
- Cash Flow Management and ForecastingBusiness isn’t the only place for clear objectives and goals. Ask any ‘Life Coach’ and they will likely tell you, life can be greatly enhanced by having clear goals and plans to achieve them.
In business, they are generally referred to as ‘Key Performance Indicators’ (KPIs).
There are two types of KPIs – ‘Leading KPIs’ and ‘Lagging KPIs’. Leading KPIs are those that drive activity and results and ‘Lagging KPIs are those that measure the results.
An easy way to explain the difference is to liken it to a personal life goal of losing weight. If you set yourself a target of losing an amount of weight, the question is how are you going to get there? The simple answer is to monitor and manage your energy intake and output i.e. food and exercise.
Your leading KPIs for intake and output is the number of calories required for your age, weight and gender to either maintain current weight or to lose a specified amount. Your lagging KPI is the amount of weight you lose over a period. Weight Watchers and others have spent years refining this process.
In business, it’s very similar. If your goal is to improve profit and cash flow and ability to grow your business, you need to work out what are the key drivers impacting results. Let’s discuss both types of KPIs.
Leading Key Performance Indicators for Business
Product/Service Development: If you want to maintain an edge over your competitors, you need to have a plan to constantly develop your products and services. KPIs to ensure improvement here might be:
- Number of new products/services launched
- Number of Research and Development projects undertaken
Marketing: If you want to keep pace with the market, you need to keep letting them know who you are and that you are ready and willing to help. KPIs here could be:
- Number of visitors to your website or premises
- Number of enquiries received from a particular marketing source
- Another useful KPI to ensure a good return on investment of your marketing dollars could be cost per enquiry. This helps you to gauge the value of all marketing dollars spent
- Number of contacts on database or Customer Relationship Management system (CRM)
Sales: Once you’ve got interest from the market you need to convert that interest into sales and ultimately dollars onto your bottom line. KPIs here could be
- The number of quotes provided
- Number of quotes won
- Number of quotes lost
- Sales conversion rate i.e. the number of sales calls made compared to those converted
- Upselling rate i.e. how many add-on products/services were sold to customers
Operations: When you have made a sale and it’s time to deliver to your customer. To ensure a consistently high level of service, it’s vital to measure your operational performance. KPIs here could be:
- Personnel productivity i.e. how many hours have been sold compared to those paid to service staff
- Work in Progress days i.e. how many days are jobs in progress prior to finishing
- Rework hours – to fix mistakes on jobs
- Stock turnover rate
- Level of backorders
- Number of days for customers to receive orders
- Product returns/complaints/defects
- Hours downtime of staff/equipment
- Overtime hours
Customer Service: Once you have a customer, it’s much easier to retain them than it is to get new ones. KPIs here could be:
- Customer retention rate
- Number of new customers acquired
- Number of major client visits attended
- Customer complaints received
- Testimonials acquired
- Referrals received
Finance: Happy customers have no reason not to pay on time, so if everything else is in order, some KPIs here could be:
- Accounts receivable days i.e. how many days are customers taking to pay, on average
- Profit by:
- Customer or type of customer
- Product/service or type of product/service
- Division
- Accounts payable days i.e. how many days are you taking to pay your suppliers
- Number of price increases or discounts given
Human Resources: Happy staff provide great service to happy customers who are happy to pay, so how happy are they? KPIs here could be:
- Work Health and Safety incidents/hazards
- Staff turnover
- Staff satisfaction
- Ideas for improvement submitted/suggested
- Staff training hours/events attended
- Incentive payments made
- Staff sick leave days
Lagging Key Performance Indicators for Business
These are mainly results-oriented indicators measured both monthly and year-to-date such as:
- Sales versus budget and last year
- Gross profit percentage versus budget and last year
- Overheads versus budget and last year
- Overheads as a percentage of sales versus budget and last year
- Net profit percentage versus budget and last year
- Current ratio
- Net equity
- Sales growth percentage
- Inventory days
- Work in progress days
Notice how the list of ‘leading KPIs’ is much larger than the ‘lagging KPIs’? That’s because it takes a lot to achieve a result in most businesses.
Some business people tend to focus on the ‘Lagging KPIs’ and fail to measure the ‘Leading KPIs’!
For more details contact us about our Virtual CFO Solutions
Peter Deverall, Safa Glass
- TestimonialsBefore engaging CFO On-Call, the bank wouldn’t support me, so debtor financing was my only option. CFO On-Call set up our new management reporting and forecasting, and the bank changed their mind. Since then, we have grown total revenue by 17%, increased gross margins from 17% to 37% and improved debtor days by 36%. We’re going from strength to strength!
Peter Deverall, CEO
Safa Glass, Brisbane, Trade
